Metal, Mining and the Consumer Industry: A Top -Down Valuation Process

4100 WordsMar 12, 201417 Pages
Contents Abstract The report uses a top-down valuation process to examine the Australian economy, the metal and mining and consumer industries and analyses BHP Billiton Limited and Woolworths Limited. Variables affecting the Australian economy are inflation and interest rates; the gross domestic product; the exchange rate; and economic risks. The metal and mining industry is the largest sector in Australia and the consumer industry is the third largest sector. The present value of the dividend model and the present value of the operating free cash flow were used to evaluate BHP Billiton Limited and Woolworths Limited. Based on the dividend model and the present value of the operating free cash…show more content…
and Japan and expected their economic growth to increase in 2014 (Schwarten, 2013). 2.5 Australian Economy Summary In summary, Australia currently has a stable economy with an increasing GDP, low inflation rate and interest rate which are the advantages for the share price. However, the high exchange rate and economic risks could negatively influence the share market. 3.0 Industry Analysis 3.1 Metal and Mining Industry One of the largest sectors in Australia, the metal and mining industry, includes over 760 companies comprising some of the world's largest resource companies such as BHP Billiton and Rio Tinto; and considered to be highly competitive (ASX, 2013a). According to Porter (cited in Reilly & Brown, 2009), the intensity of competition within an industry is a significant element influencing the earnings forecast of that industry. Consequently, the firm may demand cost cutting in order to create greater competition and market share which may then have an impact on the rate of return. According to S&P/ASX 300 Metals & Mining (Appendix 1), the total return of negative 17.39% and price return of negative 19.54% indicate a poor performance due to the high cost of the Australian economy. Daley and Kehoe (2012) state more than half of Australian mines have costs above the international average which causes the industry to lose its competitive edge and thus exports will decrease. Additionally, uncertainty of demand and price partially

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